02510cam a22003017 4500001000700000003000500007005001700012008004100029100001900070245009200089260006600181490004200247500002000289520043300309520057400742530006101316538007201377538003601449690014101485690011001626690008901736690007501825690011401900710004202014830007702056856003802133856003702171w16409NBER20161209091249.0161209s2010 mau||||fs|||| 000 0 eng d1 aBohn, Henning.10aShould Public Retirement Plans be Fully Funded?h[electronic resource] /cHenning Bohn. aCambridge, Mass.bNational Bureau of Economic Researchc2010.1 aNBER working paper seriesvno. w16409 aSeptember 2010.3 aMost state and local retirement plans strive for full funding, at least by actuarial standards. Funding measured at market values fluctuates and often falls short. A common argument for full funding is that pensions are a form of deferred compensation that does not justify a debt. The paper examines public finance, political economy, and financial market issues that bear on optimal funding, broadly and in a series of models.3 aIn a model where most taxpayers hold debt and face intermediation costs, returns on pension assets are less than taxpayers' cost of borrowing. Pension funding is costly and hence zero funding is optimal. The model also implies that unfunded pension promises are properly discounted at a rate strictly greater than the government's borrowing rate. If pension funds serve as collateral, funding can be warranted despite the cost. This is shown in a model with legal ambiguity and default risk. Except in special cases, the optimal funding ratio is less than full funding. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aG23 - Non-bank Financial Institutions • Financial Instruments • Institutional Investors2Journal of Economic Literature class. 7aH7 - State and Local Government • Intergovernmental Relations2Journal of Economic Literature class. 7aH72 - State and Local Budget and Expenditures2Journal of Economic Literature class. 7aH74 - State and Local Borrowing2Journal of Economic Literature class. 7aH83 - Public Administration • Public Sector Accounting and Audits2Journal of Economic Literature class.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w16409.4 uhttp://www.nber.org/papers/w1640941uhttp://dx.doi.org/10.3386/w16409